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Long And Boring Wins The Race
If you listen to most radio shows, watch most TV broadcasts, or read most papers on investing you probably, like me, get it in your head that the entire world invests for the short term. There are a ton of shows out that promote quick and easy profits from flipping houses. It seems that the quicker, the return the more people desire that return. My post today is attempting to argue that the best money to be made in real estate is really very long term in focus. While many people live and die with the excitement of stocks or ups and downs of flipping strategies, look at the following paragraphs with an open mind for the boring.
3 Reasons Boring Does Win The Race
1. The first reason holding properties for a long time is that a property owner's highest interest rates are paid first. This is actually true no matter what strategy you use or even if you simply own your own home. The banks make a ton of money from you when you sell a property within the first 5-10 years of its mortgage. Why? Because mortgages are front end loaded. Take a look at your mortgage payments the next chance you get and you will see I speak the truth. If you have a $300,000 mortgage amortized for 25 years at an interest rate of 3%, you will pay almost $8,900 just in interest in the first year of that mortgage, or almost $42,000 in the first 5 years. In the last five years of the mortgage the interest payments will equal almost $7,000, and in the last year you will pay a grand total of almost $300 in interest.
Again, mortgage interest is front loaded in order to give the bank a major portion of their money up front and allow them to take advantage of people who move constantly. You pay off little principal in the first 5-10 years, but pay off a ton of principal later on in the mortgage
2. I have covered this second reason in a previous post. Click on this link if you want to read more about how it works. Did you know that the longer you own a mortgage, the less each dollar of the mortgage is worth? Inflation eats away at our money constantly. If you believe that inflation is at 3%, then you $1 today will be worth $.50 in 21 years. In other words $100,000 today will be worth $50,000! What this means is that the longer you hold that mortgage, the faster it becomes easy to pay off. A different way to explain this is that if you make $7,000 each month right now and continue to make the equivalent of what $7,000 can purchase today you will be making $14,000 in just over 21 years, but your mortgage payments will remain the same... If they are $2,000 each month right now, they will still be at $2,000 each month if interest rates stay the same.
Again, it becomes easier to pay down the mortgage because it is quickly worth less as time goes by. Owning a house long term is to your benefit. If you don't believe me, ask your parents or grandparents how difficult it was to make their payments in the first few years of their mortgage and how easy it is now (This only works if they have kept one property for a long time without refinancing it).
3. You save an extreme amount in taxes if you hold properties long term. I discuss this in detail in this post if you want to know more, but I will summarize that post quickly here. You pay taxes on the increase of a property's worth when you sell that property. If you never sell the property, you never have to pay taxes on it's gain in equity/value (your estate may not have to pay either if you set things up properly for your children when you die). You can even pull most of the equity out of the property without paying taxes on it. You do this by taking our a home equity line of credit. This actually decreases your taxes even more because you will be paying interest on that line of credit and the interest is a tax write off in itself!
Summary
I recently read the book "The Millionaire Next Door" and was reminded that North Americans who are wealth consistently build their wealth by holding onto their investments long term. The book was written by a couple of men who give detailed statistics for most of what they explain in the book and I highly recommend the read. Owning real estate for long periods of time is how many of the boomer generation became millionaires. Those who didn't, yet invested quite a bit of money in various investment classes typically bought and sold investments more frequently.
Here's to your future of risk-averse investing!
If you would like to learn more about investing in real estate please
contact me at the email address listed at the beginning of this article
or go to my website at: www.akerahomes.com/investing-in-real-estate.html
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